This week marks the start of one lesser-known provisions in the federal stimulus bill - one that has lots of small business owners griping: the Cobra extension.
Under the terms of the stimulus bill, recently laid-off workers get a discount on their continuing employer-sponsored health-care coverage, known as Cobra. Instead of paying the whole premium – which can easily exceed $1,000 per month – workers pay only 35%. The sticking point for their former employers is that they have to pay the remaining 65%, for up to nine months. The law applies to companies with 20 or more employees.
The companies aren’t expected to bear the cost forever. Businesses can withhold the amount of the payments from their next federal tax bill.
Even so, the temporary payment is a tough pill to swallow for small companies that are staring down cash crunches. “It’s an interest-free loan to the government,” says William Leake, chief executive at online search marketing company Apogee Search. Apogee laid off close to 10 employees early this year, bringing the company’s employee count to 50. “It’s not a problem if you’re a big giant company. If you’re in that 20 to 150 or 200 range, it’s a big compliance pain in the rear,” Mr. Leake says.
The requirement can be more than just a pain in the rear for companies that are truly struggling and desperate to hang onto their cash. “Cash flow is the lifeblood to many small businesses and even more vital to businesses that are struggling,” says Kevin Ryan, a CPA and partner with accounting and consulting company Citrin Cooperman & Company. Cash-flow squeezes from these kinds of provisions can hurt borrowing prospects or delay payments to suppliers, Mr. Ryan says – triggering a wave of serious problems.
Readers, is the new rule fair to small businesses? Has your company been affected?
Photo: AP
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